Structured Settlements Structured Settlement Basics 1 — Questions and Answers
Question 1: What is a structured settlement?
- A lump-sum payment made immediately to a claimant
- A series of periodic payments made to a claimant over time as part of a legal settlement (Correct answer)
- A court-ordered fine paid by a defendant
- A government benefit program for injured workers
Correct answer: A series of periodic payments made to a claimant over time as part of a legal settlement
A structured settlement is an arrangement in which a defendant agrees to make periodic payments to a plaintiff over a set period instead of a single lump sum.
Question 2: Which federal law governs the tax treatment of structured settlement payments?
- The Employee Retirement Income Security Act (ERISA)
- The Periodic Payment Settlement Act of 1982 (Correct answer)
- The Structured Settlement Protection Act
- The Social Security Act
Correct answer: The Periodic Payment Settlement Act of 1982
The Periodic Payment Settlement Act of 1982 established the federal tax framework for structured settlements, codified under IRC §104(a)(2).
Question 3: Which IRC section exempts personal physical injury structured settlement payments from federal income tax?
- IRC §72
- IRC §101
- IRC §104(a)(2) (Correct answer)
- IRC §1031
Correct answer: IRC §104(a)(2)
IRC §104(a)(2) excludes from gross income damages received on account of personal physical injuries or physical sickness, including structured settlement payments.
Question 4: What entity typically funds the periodic payments in a structured settlement?
- The plaintiff's attorney
- A life insurance company through an annuity contract (Correct answer)
- The federal government
- A mutual fund company
Correct answer: A life insurance company through an annuity contract
A life insurance company issues an annuity contract that funds the periodic payments guaranteed under the structured settlement.
Question 5: Which party is typically referred to as the 'claimant' in a structured settlement?
- The defendant
- The insurance company
- The injured plaintiff receiving payments (Correct answer)
- The defense attorney
Correct answer: The injured plaintiff receiving payments
The claimant is the injured party (plaintiff) who receives the periodic payments agreed upon in the structured settlement.
Question 6: What is the primary advantage of a structured settlement over a lump-sum payment for a physical injury claimant in the US?
- Higher total payout guaranteed by law
- All periodic payments are income-tax-free under IRC §104 (Correct answer)
- No need for a settlement agreement
- Payments are backed by the US Treasury
Correct answer: All periodic payments are income-tax-free under IRC §104
Under IRC §104(a)(2), all periodic payments from a properly structured personal physical injury settlement are excluded from federal income tax.
Structured Settlements Structured Settlement Basics 1
What is a structured settlement?